Chicago’s fiscal progress on structural balance and pensions drew rating upgrades and high-grade investors to recent bond deals but easing the longer term strains of pensions will require state intervention, Mayor Lori Lightfoot said.  

Whether the city’s fiscal momentum can help Lightfoot win a second term is uncertain.

She faces eight rivals vying for the mayor’s office on the Feb. 28th ballot. While city finances played a more prominent role in the last few elections, they have taken a backseat to pressing social issues led by crime, so a speech Friday before a business crowd offered an opportunity to make her case.

Deficits have narrowed, reserves and fund balances are at a peak at $1.1 billion and the budget is more structurally aligned with new funding streams in place from an approved casino license and a long-term contract to sell Chicago water.

The pension system now receives actuarially-based contributions and this year for the first time received a supplemental payment with the goal of staving off investment sales to meet annuity obligations.

“We’ve gotten the city back on a proper financial footing and we are building a Chicago where everyone has the opportunity to participate in the wealth of this great city,” Lightfoot said in an address to the City Club.

Fiscal gains prompted Moody’s Investors Service to lift the city’s general obligation rating out from junk in November raising it to Baa3 from Ba1.

Fitch Ratings in October raised the city’s rating to BBB from BBB-minus and assigned a positive outlook while Kroll Bond Rating Agency and S&P Global Ratings revised their outlooks on their respective A and BBB-plus ratings to positive.

“Not only did we get the validation from the rating agencies,” Lightfoot said. “In both transactions the city saw bond investors that invest only in high-grade credits come and buy our bonds for the first time in years,” Lightfoot said of the two recent transactions.

Chief Financial Officer Jennie Huang Bennett previously said the city’s Sales Tax Securitization Corp. transaction this month that included the city’s first “social” designated bonds drew 30 new investors including some high-grade funds like insurers as did a GO sale in December.

The city fully phased out scoop-and-toss debt restructuring and moved fully to an actuarially-based pension contribution for the city’s four funds — a process begun on both fronts in the second term of Lightfoot’s predecessor Rahm Emanuel but completed during Lightfoot’s term that began in 2019.

With the end of scoop-and-tossing principal as it came due, the city has paid down $747 million of debt since 2019 and is now amortizing $300 million to $400 million annually, paving the way for borrowing to support a $5.3 billion five-year capital program and $660 million to fund the $1.2 billion COVID Chicago Recovery Plan.

Lightfoot inherited an $838 million budget gap heading into her first budget and due to the COVID-19 pandemic a gap of $1.2 billion loomed in 2021 and $733 million in 2022. The city trimmed the red ink to $128 million heading into 2023 with pandemic relief still providing a cushion, more than $1.2 billion in structural reforms taking hold, and strong revenue collections.

The city operates on a $16.4 billion all-funds spending package including a $5.4 billion corporate fund.

The proposed 100-year water contract with Joliet that is expected to eventually extend to further communities provides $1 billion in value and the casino will generate at least $200 million annually once up and running in 2026. “We will never sell our water asset but we will monetize it in a way to the benefit of our city,” Lightfoot said.

The city’s reserves that include proceeds of its Chicago Skyway concession lease, its unassigned fund balance and liquidity fund, have steadily risen hitting a combined $1.1 billion last year compared to $624 million in 2013. The city did not dip into them to manage the pandemic.

The city hit a milestone last year by reaching an actuarially based payment to each of its funds putting all four on a path to 90% funding between 2055 and 2058. Net liabilities grew to $33.7 billion in 2021 from $32.96 billion for 2020. All saw improved funded ratios but their health remains weak at between 21% and $46%.

The city adopted a new pension funding policy for 2023 that calls for advancing a supplemental payment tied to an amount needed to keep the unfunded liabilities from growing further. It sent a $242 million supplement to the funds earlier this month which will bring to $2.7 billion the total being paid in 2023.

Further headway to avoid “pouring money into a system that is fundamentally flawed” and consumes money needed for services is needed at the state level, Lightfoot said.

Gov. J.B. Pritzker won state legislative support in 2019 to consolidate the assets of downstate and suburban public safety public funds into a single police fund and a single fire fund but the savings are limited and local governments across the state have turned to pension obligation bonds, service cuts, asset privatization, and higher taxes to meet the demand of rising contributions.

“We were supposed to be next,” Lightfoot said of discussions over a fix that was to follow that 2019 legislation. “We are all laboring to meet out our pension obligations and there has to be some structural solutions … I’m going to and have started to re-up those conversations … This is something that I think Springfield and governor’s office have to take notice of and start the process.”

Lightfoot declined to cite specific fixes. The state constitution protects public pensions statewide from being diminished and impaired through cuts and Pritzker opposes putting a constitutional amendment on the ballot.

Lightfoot had previously pitched the idea of a state takeover of city funds but Pritzker shot it down.

Lightfoot tried to quell worries the city faces a daunting “fiscal cliff” once it exhausts the $1.9 billion in American Rescue Plan Act funds stressing that most investments are one-time in nature and won’t pose a structural burden.

Some market participants worry that the city will still face pressure to maintain spending funded by federal relief in the future burdening the corporate fund and that the budget will be strained by a recession and if workers don’t return to downturn in greater numbers to support commercial property tax rates.

If no candidate receives more than 50% of the vote Feb. 28 – so far no candidate is near that threshold in polling — the top two face off in an April 4th run-off. The victor is inaugurated in May.